Secure Energy Services Inc.

Secure Energy Services Inc. (TSX: SES) provides integrated treatments and disposal service to the oil and gas industries which constitute midstream services, environmental services, systems and products for drilling, production and completion fluids, and other specialized services and products. 

Q1FY20 Financial Highlights: Secure Energy Services declared its quarterly numbers and reported a de-growth in the top-line. Revenue stood at CAD 611.09 million, as compared to CAD 788.88 million in the previous corresponding quarter. The decline was primarily attributable to a sharp decline in the crude oil price along with a lower marketing and rail activity. The quarter was marked by higher crude oil terminalling and pipeline volumes (up 18% on YoY basis), while Water disposal volumes went up by ~17% from Q1FY19. Gross margin shrank to CAD 30.28 million from CAD 39.91 million in the previous corresponding quarter due to a decline in the revenue. The quarter was marked by the inclusion of impairment and restructuring costs amounting to CAD 25.10 million, which resulted in an operating loss of CAD 18.56 million against an operating income of CAD 11.46 million in pcp. Net loss, during Q1FY20 stood at CAD 22.41 million, as compared to CAD 1.26 million in pcp, partially supported by an income tax recovery. The Company paid a monthly cash dividend of 0.25 cents per common share.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Key risks: Reduced drilling activities from the clients can result in a Material decline in revenue and cash flows for the company. Further, a lower demand scenario is likely to affect the oil producers, which in turn could increase the counterparty risk for the company.

Valuation Methodology (Illustrative): Price to CF Based Valuation

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock corrected ~64% so far this year. The company has taken certain measures to preserve liquidity. The group has reduced its capital program by ~25% to CAD 60 million. Further, the group has reduced its dividend distribution and reduced personal cost by 25%. The company seems to have decent liquidity with CAD 272.7 million available in the credit facility, which is likely to help in meeting the near requirement. The company’s business is highly concentrated on production volumes or related services and accounts for ~75% of Adjusted EBITDA. These volumes are fee-for-service contracts which are expected to provide cash flow stability. In the first quarter, the company is likely to complete the construction of its East Kaybob Oil Pipeline. The project provides long-term fee-for-service revenues from tariffs and reliable volumes.  The stock appreciated ~55% and ~111% in the last one month and three months, respectively, due to improvement of the international crude oil prices. Though lower drilling activities poses a challenge to the group, we believe a demand of oil to recover gradually as most of the states are easing lockdown restrictions. Increasing oil demand is likely to benefit the company’s financial performance. We have valued the stock using the price to CF based relative valuation method and have arrived at a target upside offering double-digit (in percentage terms). For the said purposes, we have considered CES Energy Solutions Corp (TSX: CEU), Enerflex Ltd (TSX: EFX) and Tervita Corp (TSX: TEV) etc., as a peer group. Hence, considering the aforementioned facts and risk involved, we recommend a ‘Speculative Buy’ rating on the stock at the closing market price of CAD 1.80 on June 23, 2020.

SES Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Canacol Energy Ltd.

Canacol Energy Ltd (TSX: CNE) is engaged in the business of exploration and production of oil and natural gas in Colombia.

The group recently reported that the demand for natural gas has recovered in the later part of May 2020. Realized contractual gas sales increased to 181 MMscfpd in the second half of May compared to 130 MMscfpd in the first half of May. The above updates are encouraging and indicate a revival of the demand.

Q1FY20 Financial Highlights: For the period ended March 31, 2020, CNE reported a decent top-line growth while the bottom-line was marred by higher income tax expense. Total natural gas, LNG and crude oil revenues, net of royalties soared to USD 82.28 million, from USD 50.93 million in pcp. The increase was driven by a tremendous growth in Natural gas and LNG segment. Income before income taxes stood strong at USD 24.89 million, as compared to USD 11.03 million in Q1FY19, thanks to a higher revenue while an increase in transportation expenses, depletion and depreciation costs remained as a drag. The quarter witnessed a surge in deferred income tax amounting to USD 41.14 million, which resulted in a net loss of USD 25.98 million, against a net income of USD 6.27 million in the previous corresponding quarter. The group reported a realization price of Natural gas and LNG at USD 3.60/Mcf, against USD 4.03/Mcf in Q1FY19. Colombia oil and Corporate stood USD 20.13/ Mcf and USD 20.49/Mcf, respectively, as compared to USD 23.64/Mcf and USD 23.00/Mcf in the previous corresponding quarter. Capital expenditure stood relatively lower at USD 19.89 million, as compared to the previous corresponding quarter of USD 34.72 million. The Company exited the quarter with cash and cash equivalents of USD 49.15 million while total assets stood at USD 745.79 million.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Risk: Any further extension in lockdown by government or outbreak of the second wave of the novel virus would be catastrophic to oil and natural gas demand. Any such scenario would impact the group’s financial performance adversely.

Valuation Methodology: Price to CF Based (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock corrected ~20% so far this year, due to sharp correction in the crude oil prices on account of COVID 19 crisis. The majority of the group’s production volume is subject to long-term fixed-price contracts, which limits the exposure to commodity price risk, including current volatility prices as a result of COVID-19. The group expects the demand for its natural gas in Colombia to increase in the near term due to an unusually dry winter, and in the medium to long term related to the continued decline of Colombia’s main gas producing fields. Further, the recent update from the company suggests that the demand for natural gas is increasing following the easing of lockdown restriction announced by the government. We expect the demand for natural gas and oil to increase further as industrial and economic activities start to pick pace in the near term. Further, the stock is offering a dividend yield of 5.5%, which is lucrative in the prevailing interest rate environment. The stock closed above its 50-days and 75-days simple moving average of CAD 3.69 and CAD 3.64, respectively, indicating higher investors interest. We have valued the stock using the Price to CF based relative valuation method and have arrived at a target upside offering double-digit (in percentage terms). For the said purposes, we have considered the industry average (Oil & Gas) on an NTM basis. Hence, we recommend a ‘Speculative Buy’ rating on the stock at the closing market price of CAD 3.76 on June 23, 2020.

CNE Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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